Statistical characteristics of video signals for video packet coding, are clarified and a variable-bit-rate coding method for asynchronous transfer mode (ATM) networks is described that is capable of compensating for packet loss. ATM capabilities are shown to be greatly affected by delay, delay jitter, and packet loss probability. Packet loss has the greatest influence on picture quality. Packets may be lost either due to random bit error in a cell header or to network control when traffic is congested. A layered coding technique using discrete-cosine transform (DCT) coding is presented which is suitable for packet loss compensation. The influence of packet loss on picture quality is discussed, and decoded pictures with packet loss are shown. The proposed algorithm was verified by computer simulations.>